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The Breakfast Briefing

Five years ago today, the stock market was ringing in record highs. Now, those all-time highs are within shouting distance again.

On Oct. 9, 2007, the Dow closed at an all-time high of 14164.53. Fast forward through the worst financial crisis since the Great Depression, a stubbornly slow economic recovery and an extremely accommodative Federal Reserve, and the Dow is only 4.1% away from that record level.

The market’s roundabout route, though, doesn’t tell the complete story of what has transpired over the last five years.

Back then, financial stocks were kings of the market. Now, financials are stuck in the doldrums, down about 55% since October 2007 and are good for the S&P 500’s worst-performing sector, according to Silverblatt. Meanwhile, consumer stocks have become the new leaders. Consumer staples are up about 30% over the last five years, while discretionary stocks are up approximately 26%.

Back then, the bubble in the U.S. housing market was bursting. Now, the housing recovery is finally gaining some traction. Many homebuilder stocks, including PulteGroup, Lennar and D.R. Horton, have more than doubled over the last 12 months.

Back then, the Fed’s key interest rate was at 4.75%, as the central bank was just beginning to cut rates and navigate the economy through the credit crunch. Now, the Fed is holding rates at historic lows between 0% and 0.25%, a range that hasn’t changed in nearly four years. The Fed has also implemented a number of stimulus programs to boost jobs and jumpstart the economy, with the latest bond-buying initiative being the most aggressive yet.

Back then, the U.S. economy expanded at a 4.9% clip during the third quarter of 2007, the fastest pace of GDP growth in four years. Now, second-quarter GDP was recently revised down to 1.3%, and economists expect third-quarter growth to come in between 1.5% and 2.0%.

Back then, Apple Inc. shares finished at $167.86. The original iPhone was less than four months old. Now, Apple shares have nearly quadrupled over the last five years, finishing Monday at $638.17. Over the summer, Apple surpassed Microsoft as the biggest U.S. company ever, measured by stock-market value.

As much as the market landscape has changed in five years, there are still some striking similarities. At just over $100, earnings per share for S&P 500 companies is sitting around record highs, similar to 2007 when earnings clocked in around $90 a share.

The market’s valuation then and now is also comparable. The S&P 500′s price-to-earnings ratio, at 12.9, is similar to the 14.5 P/E ratio in 2007, according to Jeffrey Kleintop, chief market strategist at LPL Financial. Both are below the tech-bubble peak, when the P/E ratio spiked to 25.0.

But the biggest difference between now and five years ago has been the Fed. Between all of the QEs and Operation Twists, the Fed’s actions have been one of the major underpinnings of the market’s rally off the 2009 lows.

The old adage “don’t fight the Fed” is alive and well. In fact, it may be the strongest catalyst yet that could propel stocks back to all-time highs.

Morning MarketBeat Daily Factoid: On this day in 2006, Google announced it was buying YouTube, a stock deal that was valued at $1.65 billion.

Yum Brands is set to post its latest quarterly profit statement after the closing bell. The parent of fast-food chains KFC, Pizza Hut and Taco Bell is expected to earn 97 cents a share on revenue of $3.66 billion, according to the average estimate of analysts polled by FactSet. Global same-store sales are expected to rise 3.7%.

Also on tap is Alcoa, and the metals giant should break even on a per-share basis with sales of $5.57 billion if Wall Street’s best guesses are on the mark.

AngioDynamics could hit the skids: Late Monday, the stock dropped more than 6% after the company said it swung to a loss in its fiscal first quarter and that it would acquire Vortex Medical for $15 million.

Comments (1 of 1)

The beneficial effects of various FED monetary interventions on financial assets seems to be less and less over time with each new intervention. Markets are not getting the boost that past FED interventions once caused ( QE 1, QE2). Call it the point of diminishing returns. What's next? Perhaps the FED will start to directly purchase S&P 500 Index futures and even buy stocks directly to try to push the markets up over the top to a brand new high. Eventually, what goes up usually comes down. Then, economic reality takes over. So be careful after the election is over and going into 2013 !

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